Once upon a time, everyone was going to live happily ever after with perpetual growth in the equity market.
"That pipe dream is over," says Dan Genter, president of RNC Genter Capital Management, explaining that the aftermath of the 2008 financial crisis has shown that people cannot rely on capital appreciation to meet their needs.

Most of Genter's clients have been investing for at least a decade, and have made it through the dot-com bust and the mortgage meltdown. "Not only have they been hit between the eyes twice, but also the runway they have to retirement is significantly shorter. They realize they can't keep going through these types of cycles," he says.

Genter says clients are preoccupied with risk-with smoothing out returns and reducing their volatility. In what is basically a 1.5%-return environment, they wonder where a predictable income stream to live on will come from. "Those two [issues] go hand in hand, and that's what people are struggling with," he says.

Separate Account Management
RNC Genter helps clients deal with these issues with individualized separate account management that uses the common stocks of large- and medium-capitalized corporations, government fixed income and investment-grade corporate and municipal fixed income.

When Genter came on board in 1979, the firm was known as RNC Capital Management. With some $40 million under management, it was operating as a sister company to one primarily involved in real estate syndications. By 1990, its assets had grown to around $1 billion, and it was sold to Austria's Länderbank, which merged the following year with Zentralsparkasse und Kommerzialbank to become Bank Austria.

Genter ran the operation for Bank Austria until 1998, when he bought it back and put his name on the shingle. Today, RNC Genter manages nearly $4 billion with a staff of 66 and has some 5,000 clients.

The firm caters to high-net-worth families and individuals, representing both multigenerational and new wealth, and to medium-size pension plans. A second client category comprises professional entertainers who appear on camera or on screen; producers, writers and directors; and professional athletes. These are different from private clients in that the firm works mainly with their business managers, who act as their liaison, and their portfolios often require considerable custom tailoring because of sporadic income flows.

Many clients also come via boutique RIAs and national brokerage firms on whose platforms RNC Genter is a
manager, including Oppenheimer, Credit Suisse, Brinker Capital and LPL.

All accounts except those coming in through the platforms are individually structured. This means looking at clients' overall risk profile, time horizons and individual tax situation in order to structure their portfolios in a way to provide any income or cash flow they need, provide for any known liabilities that may be coming up in their lives and provide the highest after-tax rate of return.  

Market Niche
After Genter bought back the firm, he and his colleagues, who had been in the fixed-income game for many years, found a niche that wasn't being served, where RNC Genter felt it could garner assets. They noted a void in institutional-caliber, fixed-income management to the middle market, both institutional and high-net-worth individuals.

"At the time, you really couldn't go to the very large firms because their minimums for fixed income and those who were specializing in fixed income were just way too high," he says. "It wasn't an option for separate account management."

They decided to spend time and capital allocation to put together trading systems and portfolio allocation systems as well as the philosophical implementation to be able to serve the middle market. Genter says the challenge was how to deal with cash flows and trade orders from smaller clients and-the biggest challenge-take medium size accounts and aggregate trades so that the firm was doing block trades as if it were a large institution.

"The goal," he says, "was to be able to have separate custom tailoring from the standpoint of goals, objectives, tax planning and the like, but now from a management standpoint and from a trading and implementation standpoint be able to trade them as close to them being one as possible."  

Top-Down, Bottom-Up
As a fixed-income manager, RNC Genter is an active manager, says Genter. "We believe the days of having a safe-deposit-box mentality are over; they have been over for quite some time with regard to both return generation and risk control."

The firm actively manages the average maturity and the durations; the maturity distribution along the entire maturity curve spectrum; and the securities it has in different sectors-whether Treasuries, agencies and corporate bonds, municipals, general obligations or revenue bonds. It also actively manages along the quality scale, shifting among the different investment-grade qualities so all securities stay investment grade.

RNC Genter's management style starts with a top-down approach to get a sense of where the overall market is going. An intensive quarterly meeting of all the firm's investment professionals results in written outlooks and policies regarding GDP growth, where core and headline inflation is headed and the direction of interest rates, earnings and dividend growth.

"As we break down into doing the fixed-income section and the equity section, as we look for individual ideas, we want to affirm that we have continuity with where we think the big picture is as a check and balance," he says.
Based on those macro factors, various decisions on the fixed-income side follow: overall maturity targets and interest rate directions; whether to be somewhat longer than the market or shorter; determining if the earnings environment is good and the economic environment and cash flows are improving, whether to have more in corporate bonds and less in Treasuries; and what sectors to be in.

Once the team has decided maturity, quality and sector distribution, they shift to a bottom-up process to find names to fill those sleeves. This involves a fundamental, grassroots search for ideas, and then doing quantitative breakeven analysis and stress-testing the overall portfolios to make sure each one is going to meet those parameters.

On the equity side-which comprises high-dividend, value and core equity strategies and a combination of value and growth-they follow the same process. The firm's research analysts look for new ideas, in addition to maintaining research on and rating the firm's existing ideas. Separately, a portfolio management team carries out the implementation.

The equity side tends to have a value tilt, and in the high-dividend space, stocks must meet certain parameters with regard to dividend generation. "The dividend strategy is not your grandfather's portfolio," says Genter. "Four hundred and one of the S&P 500 companies are now paying dividends, so you can get representation in all of the major sector groups and even in most of the sub-industry groups and structure a very diversified portfolio."

In mid-May, these were some of the names RNC Genter was using in that strategy:
Energy: Phillips Petroleum, Total
Industrials: General Electric, Illinois Tool Works, UPS
Consumer discretionary: Target
Consumer staples: Altria, Philip Morris, Molson Coors
Healthcare: Johnson & Johnson, Merck, Pfizer
Financials: Aflac, BlackRock, Marsh & McLennan, Wells Fargo, JPMorgan
Technology: Intel, Applied Materials
Telecoms: AT&T, CenturyLink.

Ensuring Consistency
RNC Genter's risk management involves being very consistent with the securities selected. Genter says a mistake people often make is to stretch for either yield or growth, and begin to move away from their core competency or the core target they were structuring in the portfolio. "Falling victim to that siren song is a very easy thing to do," he says.

To ensure consistency, RNC Genter imposes basic parameters. For example, in the high-dividend equity space, these include a minimum dividend of 2.5%, no cuts in dividends during the previous five years and the likelihood that the portfolio will generate roughly double the S&P 500 in dividend cash flow. In addition, the underlying straight debt of all stocks has to be investment grade. "These specific parameters keep you on the straight and narrow so you stay very consistent," Genter says.

Similarly on the bond side: meeting quality parameters, and ensuring that what is being bought and the desired cash flow are consistent.

The other primary way the firm controls risk is by portfolio structure. Genter says one of the biggest mistakes of amateur investors as they start assembling their portfolios is in the individual stocks and bonds they select. "It's how those individual securities and ideas marry together to control the risk and diversification that makes the difference," he says.

He says no individual position should exceed 5% of the total portfolio, which should be diversified by economic sector and by economic sub-sector; if the portfolio is overweight in a specific sector, managers must be able to identify the reason why. "It's OK to make bets, but it's important to understand where your bets are and the probable influence on your portfolio," he says.

On the stock side, the firm controls risk from a stock-bond-cash position because it has many balanced portfolios. It controls the overall sector allocation, and it makes sure not to be too invested in one stock.